The domestic steel sector will benefit from the government decision to keep away from the regional comprehensive economic partnership (RCEP), which is the world’s largest trading bloc covering nearly a third of the global GDP and population, according to a report.
In a big boost to China, 15 nations on November 15 inked the RCEP, which provides for progressively lower tariffs across many areas over the years. The RCEP is the world’s biggest trade pact involving 10 ASEAN countries along with China, Japan, Korea, New Zealand and Australia.
The RCEP covers a market of 2.2 billion people and USD 26.2 trillion of global economic output and accounts for about 30 per cent of the population as well as the global economy.
Over the past decade, domestic steel companies have been under severe margin pressure due to a swarm of cheap imports from RCEP members such as China, South Korea, Japan and Vietnam, and any multilateral free-trade agreements – particularly comprising China – could have posed more credit risks to domestic steel producers, India Ratings said in the report on Friday.
India is the second-largest steel market after China. Imports from these countries have increased to about 57 per cent of overall imports in FY20 from about 43 per cent in FY17 and that New Delhi’s entry into the RCEP could have aggravated the pressure on domestic steel companies’ sales and margins, the report said.
“Keeping away from the RCEP will help keep the credit dynamics of the domestic steel sector remain robust and resilient,” it added.
Domestic steel producers can now effectively seek the benefits of such partnerships only if adequate safeguard mechanisms are in place. However, the report notes that by keeping off the RCEP, India will lose its influence in the Asian steel market and to be globally competitive, it will have to integrate with the global steel value chain.
According to the agency, since the domestic steel producers have a low reliance on exports, opting out of the RCEP should not materially impact the country’s long-term investments and export plans under the new national steel policy.
Allowing China to tap the domestic market duty-free could be perilous, given the large size of its capacity, which can create a large imbalance in the domestic demand-supply dynamics, the report said.
China’s steel capacity and its domestic consumption are about 10x of India’s and about half of the world’s total.
Noting that India’s cost disadvantages more than offset its competitiveness, the report said that compared to China, India’s overall cost of steel deliveries is estimated to be higher by USD 40/tonne due to the cost disadvantages such as poor logistics and infrastructure, higher royalty and tax burden on mining, expensive power and cost of capital.
India also has a high reliance on imported coking coal, which poses raw material availability and price risks, further constraining its competitiveness.
The 2017 new steel policy has set a target of increasing capacity to 300 million tonne by 2030 by investing around Rs 10 lakh crore, and if it has joined the RCEP this would have been in jeopardy due to the massive excess capacity in China, which would flood India with cheap imports. The current capacity is only 140 million tonne, which means between 2021 and 2030 it would add 160 MT more.
The agency expects long-term domestic steel demand growth should remain robust at around 7 per cent, supported by healthy economic growth and gross fixed capital formation.